Does the legal representative have joint obligations to corporate debts?

GV Lawyers would like to introduce our readers an article by Lawyer Do Duc Anh and Ms. Truong Ngoc Mai titled “Does the legal representative have joint obligations to corporate debts?” was published in Saigon Economic Times No. 24-2021 (1,591) on 10 June 2021.

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The Covid-19 pandemic has not passed, many businesses have not only fallen into a state of business stagnation or even paralysis, but also entangled in “pressed” debt disputes leading to court proceedings. Who will pay this debt?

The term “legal representative of the enterprise” (Legal Representative) is quite familiar to business people and administrators. It can be seen that in fact, legal representatives are usually investors contribute capital to the enterprise to engage in the management and administration of such enterprise.

Thus, in a sense, business results of enterprises have a direct impact on the interests of legal representatives. In other words, the interests of enterprises and legal representatives are closely linked. Perhaps from such a perspective, there is a belief that when an enterprise has an obligation to pay its debt, the legal representatives must also have a joint obligation.

That belief tends to be more prevalent in the face of the challenging economic situation during the Covid-19 pandemic, when not only business activities are halted or even paralyzed, but many businesses are also caught in lawsuits. Debt disputes are so “highly pressed” that they have to go to court, and there are companies that lose their lawsuits and have no money or assets for judgment enforcement. And then people question the involvement of legal representatives in the debt repayment obligations of enterprises, especially when legal representatives still show a fairly comfortable image of themselves economically, such as still living in a good house, traveling in their own cars controlled by drivers, … It is whether they might enjoy the profits and push the debts to the enterprise.

Does the Legal Representative bear the joint payment obligation with the enterprise?

Current law provides for cases where legal representatives are personally liable for damage to enterprises, which is the case of breach of responsibilities as follows: (1) to perform assigned rights and obligations best, honestly and carefully to ensure the legitimate interests of the enterprise. (2) to be loyal to the interests of the enterprise; not to abuse their position and use information, know-how, business opportunities and other assets of the enterprise for personal gain or to serve the interests of other organizations or individuals. (3) To promptly, fully and accurately notify the enterprise of another enterprise in which they or their related persons own or has shares or contributed capital in accordance with the Law on Enterprises.

Accordingly, current law only limits personal liability for business damage in certain cases. And it should also be noted, “damage of the enterprise” (as stated in the above regulations) and “debts of the enterprise” are two completely different concepts. If the “debts of the enterprise” is the result of commercial transactions, not from the fault of the legal representatives, then the legal representatives are not personally liable for these debts.

However, in certain cases it is still possible to bind the liability of the legal representatives for paying the debts of the enterprise in the form of a personal guarantee.

In fact, the transaction parties often turn to the bank’s service known as “letter of credit” or “letter of guarantee” to secure the right to be paid. Letters of credit and letters of guarantee is by their nature “guarantee”. This is one of the measures to ensure the performance of obligations specified in the Civil Code 2015 and is also one of the most common measures in commercial business.

Guarantees in general and bank guarantees in particular are often applied in cross-border transactions. Bank guarantee is a reliable security measure because banks are usually highly reputable entities. However, in order for the bank to issue a guarantee, the parties will have to pay a fee to the bank. If no party can agree to pay the guarantee fee, this security measure cannot be established. In this case, the two businesses need to aim a personal guarantee committed by their own legal representative.

Personal guarantee: effective solution with low cost

Article 335 of the 2015 Civil Code stipulates that “A guarantee is a commitment by a third person (the guarantor) to the obligee (the guarantor) to perform an obligation on behalf of the obligee (the guaranteed party), if, upon the due date for performance of the obligation, the obligee fails to perform or improperly performs the obligation.

Thus, in signing a commitment to guarantee payment with two enterprises having a contractual relationship, the legal representative of the enterprise will play the role of a third person, ie the guarantor. And because the enterprise itself and the legal representative have a close relationship, signing a guarantee contract will not incur as many costs as using a bank guarantee service.

In fact, there have been many judgments that the Court has accepted the role of “guarantor” of the legal petitioner, requiring the legal representative to perform payment obligations on behalf of the enterprise. The first-instance judgment (which has taken legal effect) dated 23 October 2019 of the People’s Court of Gia Lam District, Hanoi City on the dispute over a credit contract between a bank and the legal entity that is granted the loan. In this judgment, the Court ordered the legal representative of the legal entity to perform his guarantee obligations under the personal guarantee contract dated 31 December 2010 for the debts of the legal entity.

Thus, in case the the legal representative of the legal entity does not enter into a personal guarantee contract with the bank, the judgment enforcement/loan recovery will have to depend on the status of the legal entity’s assets. However, in many cases, legal entities no longer have enough assets to execute judgments due to business losses; or even somehow, the legal representative has transferred the ownership of valuable assets of the legal entity to himself, making judgment enforcement/loan recovery difficult.

Therefore, a personal guarantee (especially the personal guarantee committed by the legal representative himself) can be applied as an effective backup measure when considering that the guarantee does not incur too many costs, besides, current law is not required to carry out notarization and registration procedures for this measure.

In addition, the measure of personal guarantee can be applied to any individual who plays an important role in the business such as the company owner, the chairman of the board of directors, the chairman of the members’ council, or other individuals, even though they are not directly involved in the management and administration of the enterprise, they still have a decisive voice in the business.

But in case the legal representative does not agree to sign the personal guarantee, what should be done? For commercial banks, the processing is not too difficult because the bank always has regulations on credit granting conditions that customers need to meet, or else, the bank has the right to refuse to grant credit for customers. As for enterprises that have commercial relations with each other, the parties can specifically agree in a commercial contract that: one of the conditions for a commercial contract to come into effect is that the party that is obliged to pay must be able to provide the other party with a personal guarantee from the legal representative.

The law has provisions that enterprises can apply to ensure the right to be paid under the contract. Enterprises should apply the legal provisions in commercial business practice in order to minimize the risks that may occur in the market.

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